GOOD WITH NUMBERS

Dubai 2016 | FINANCE | REVIEW: BANKING

Improvements in banking sector indicators and the growth of Dubai's largest banks underline the continued dominance of the Emirate as a global banking hub.

According to the World Economic Forum's 2015-2016 Global Competitiveness Report, the soundness of banks in the UAE ranks the 21st most competitive in the world, while the Emirate's overall financial market development was ranked 20th in the world. The banking sector in Dubai is regulated by the Central Bank of the UAE (CBUAE), whose local Dubai office serves as an intermediary between the Emirate's local banking sector and the Central Bank's main seat in the capital of the UAE. According to the Central Bank's 2015 Annual Report, the lending to stable resources ratio increased by 1.7% YoY to 86.9% at end-2015 and loan to deposits increased by 4.9% YoY to 100.9% at end-2015, while the non-performing loan ratio fell by 0.7% YoY to 6.3% at end-2015. The total capital adequacy ratio increased by 0.1% YoY to 18.3% at end-2015 and the capital adequacy ratio for Tier-1 assets increased by 0.4% YoY to 16.6% at end-2015, while the liquid assets ratio increased by 1.7% YoY to 17.4% at end-2015.

Total assets of the Central Bank increased by 14.1% YoY from $93.908 billion at the close of the 2014 to $107.178 billion at the end of 2015. By far the largest asset on the consolidated balance sheet of the Central Bank are held-to-maturity foreign securities, which totaled $44.786 billion at the end of 2015, marking a 4.27% YoY growth from the $42.950 billion recorded at the end of 2014. The $1.836 billion increase in held-to-maturity foreign securities represented 13.9% of the growth in consolidated banking assets and positions the national banking sector well to endure volatility in the global financial industry with minimum impacts on local performance. Deposits with the Central Bank increased by 25.3% YoY from $20.942 billion at the end of 2014 to $26.236 at the end of 2015, while that $5.294 billion increase represented 39.9% of the total YoY increase in value of consolidated banking assets. Cash and bank balances held by the Central Bank increased by a massive 87.16% YoY from $11.435 billion at the end of 2014 to $21.403 billion at the end of 2015, with the $9.967 increase representing more than three quarters of the increased market value of consolidated banking assets. Derivative assets fell dramatically during 2015 — one of the only balance sheet items to do so — to just $90.9 million at the end of 2015, marking a 95.56% YoY decrease from the $2.050 billion in derivative assets recorded at the beginning of the year. New to the balance sheet of the Central Bank in 2015, Gold Bullion stood at $254.29 million at the close of 2015.

Home to the headquarters of 27 of the 49 locally-incorporated and foreign banks operating in the UAE, Dubai is a hub of banking activity. Emirates NBD, formed in 2007 following the merger of Emirates Bank International and the National Bank of Dubai, is the Emirate's largest bank in terms of assets. Owing to increased incomes and a falling non-performing loan ratio, Emirates NBD reported a net profit of $492.8 million in 1Q2016, which represented an 8% increase from 1Q2015 net profit but still fell slightly short of the $525.46 million and $509.1 million first quarter profits forecast by Sico Bahrain and EFG Heremse respectively. Emirates NBD's total income increased by around 2% to $1.062 billion in 1Q2016, giving the bank a roughly 46.4% net income margin for the quarter. Emirates NBD is also Dubai's largest bank in terms of loans; a strong overall growth in loans helped compensate for smaller interest margins to drive up Emirates NBD's net income from interest payments by around 3% to $707.9 million during 1Q2016. Non-interest income dropped only slightly to around $381.2 million during the first three months of 2016, its impaired loan ratio advanced from 7.1% to 6.1%, and the impaired loan coverage ratio reached 113.5% while the ratio of its advances to deposits remained at a healthy 95.9%. The operating income of its wealth management and retail banking segment increased by 8% from 1Q2015 to $411.9 million in 1W2016. The division's net interest income increased by around 6% to $250.0 million, while income from service fees went up by close to 11% to $162.0 million, representing nearly 39% of the bank's total income. Emirates NBD's wholesale banking division ended the first three months of 2016 with a net profit of $192.0 million, a 41% YoY increase from the $135.9 million recorded as net profit recorded through the first three months of 2015.

Mashreqbank, the largest private sector bank in the Emirate, recorded a 22% YoY decline in net profit from $177.2 million in 1Q2015 to $144.8 million in 1Q2016 despite a growth in operating profit in excess of 4% during the same period to $251.3 million. The bank's total assets decreased by 1.3% to $30.956 billion at the end of the first quarter of 2016, down from $31.364 billion at the start of the year. Loans and advances from Mashreqbank increased by 1.6% during 1Q2016 to $16.635 billion, while customer deposits grew by 2.7% during the quarter to $20.583 billion, giving the bank a loan to deposit ratio of 80.8% at end-1Q2016. Mashreqbank's 1Q2016 net interest income increased by 6.4% YoY from 1Q2015 to $240.7 million thanks to 7.9% YoY increase in loans from 1Q2015. Income from net fees and commissions increased by 4.6% YoY from 1Q2015 to $121.7 million at end-1Q2016. The bank held $626.2 million in non-performing loans at end-1Q2016, making for a non-performing loan ratio of just 3.8%. Net allowances for impairment rose by 86.73% YoY from $53.4 million through the first quarter of 2015 to $99.7 million at the end of the first quarter of 2016, giving Mashreqbank a non-performing loan coverage of 135.8%. Despite the challenges faced during early 2016, Mashreqbank's capital adequacy ratio remained at a robust 16.8% at the end of 1Q2016, down only marginally from the 16.9% capital adequacy ratio recorded at the start of the year.

Sharia-compliant banking assets, also known as participation banking, of commercial banks in the QISMUT bloc are estimated to have surpassed $801 billion in 2015, accounting for approximately 80% of participation assets in the global Islamic banking sector. Accounting for 16% of the consolidated participation assets of QISMUT in 2014, the UAE is the third largest contributor to the group, trailing only Saudi Arabia and Malaysia. Preliminary estimates for 2015 put the UAE's total participation banking assets at $150 billion, and this figure is projected to reach $250 billion by 2020. The 2016 EY World Islamic Banking Competitiveness Report found the H-statistic for UAE Islamic Banks, a measure of the level competition, to be a moderate 43.5%.

Of the eight banks in the UAE that are fully sharia compliant and four conventional banks with sharia-compliant windows, such as Mashreqbank subsidiary Mashreq Al Islami, Dubai Islamic Bank is the largest bank dedicated to sharia-compliant finance and the third-largest bank overall. A public joint stock company, Dubai Islamic Bank is the largest of Dubai's Islamic banks and the Emirate's third largest bank overall. Total income increased by 17.62% YoY from $471.0 million at end-1Q2015 to $571.75 million at end-1Q2016. Meanwhile, its net operating revenue grew by 12.7% YoY from $408.4 million at end-1Q2015 to $460.1 million at end-1Q2016, putting its operating profit margin at 80.5% through the first three months of the year. Impairment losses fell by 13.2% YoY from $37.0 million during 1Q2015 to $32.1 million during 1Q2016. Dubai Islamic Bank reached a new milestone in 2015 when it surpassed $1 billion in annual profits. The optimistic sentiments of CEO Dr. Adnan Chilwan, who projected the strong performance to continue into 2016, were legitimized when the bank posted over $272.3 million at the close of the first quarter of the new year. Customer deposits grew by 9.9% during 1Q2016 from the $29.949 billion recorded at the beginning of 2016 to $33.216 billion at the end of the first quarter. Deposits in current accounts and savings accounts increased by 7.0% during the first three months of 2016 from $12.116 billion at the beginning of the year to $12.960 billion at the end of the first quarter, putting Dubai Islamic Bank's CASA ratio at approximately 39.0%. Meanwhile, deposits in investment accounts grew by 14.4% from $17.806 billion at the beginning of 2016 to $20.365 billion at the close of the first quarter. At the end of March 2016, Dubai Islamic Bank's loan-to-deposit ratio stood at 84%.

All monetary supply aggregates in the UAE experienced year-over-year increases in 2015, with M3 growing by $8.603 billion (2.4%) overall. Despite a decline during the second and third quarter of 2015, the consolidated excess liquidity of the banking sector, as measured by the total current account and holding of certificates of deposit with the Central Bank, rose significantly during the year. Consolidated current accounts held at the Central bank increased by 23% YoY from $8.057 billion at the end-2014 to $9.910 billion at end-2015, while consolidated certificates of deposit held by the Central Bank grew 40.4% YoY from $27.099 billion at the start of 2015 to $38.055 billion at the end of the year. The total liquidity of the banking sector, including government and public sector debt as well as reserve requirements, increased by 19.1% YoY from $80.317 billion at the beginning of 2015 to $95.618 billion at the end of the year.

The Regulatory Development Division of the Central Bank implemented an important regulation in 2015 that marks a significant step in the path to the UAE's full compliance with the Basel III liquidity standards by 2018-2019, particularly the Liquidity Coverage Ratio and the Net Stable Funding Ratio. The regulation provides an enhanced layer of systemic protection for the banking sector against funding shocks by requiring banks to a predetermined amount of eligible liquid assets, which in turn will increase the capacity of regulatory authorities to manage consolidated liquidity risks in the national banking system by establishing the specific parameters of the eligible liquid asset requirements. These increased control measures and the continued growth of the banking sector further highlight Dubai's position as a global banking hub.